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About this blog: I grew up in Los Angeles and moved to the area in 1963 when I started graduate school at Stanford. Nancy and I were married in 1977 and we lived for nearly 30 years in the Duveneck school area. Our children went to Paly. We moved ... (More)

About this blog: I grew up in Los Angeles and moved to the area in 1963 when I started graduate school at Stanford. Nancy and I were married in 1977 and we lived for nearly 30 years in the Duveneck school area. Our children went to Paly. We moved downtown in 2006 and enjoy being able to walk to activities. I do not drive and being downtown where I work and close to the CalTrain station and downtown amenities makes my life more independent. I have worked all my life as an economist focusing on the California economy. My work centers around two main activities. The first is helping regional planning agencies such as ABAG understand their long-term growth outlook. I do this for several regional planning agencies in northern, southern and central coast California. My other main activity is studying workforce trends and policy implications both as a professional and as a volunteer member of the NOVA (Silicon Valley) and state workforce boards. The title of the blog is Invest and Innovate and that is what I believe is the imperative for our local area, region, state and nation. That includes investing in people, in infrastructure and in making our communities great places to live and work. I served on the recent Palo Alto Infrastructure Commission. I also believe that our local and state economy benefits from being a welcoming community, which mostly we are a leader in, for people of all religions, sexual preferences and places of birth. (Hide)

Bay Area Bubble Watch: Did the Bubble Busters get Busted

Uploaded: Mar 8, 2016

Well the saying is it is not over til the fat lady sings.

But the “there’s a bubble bursting” crowd had a really bad month.

Let’s start with housing. It is where we had the last bubble. From 2004 to 2006 prices soared, low down payment loans were made and lots of homes were built here. The economy was rolling along. But prices got way out of line with incomes and people bought homes some could not reasonably afford. So well before the recession (the housing bust was a major factor in causing the recession) home prices fell sharply and foreclosures skyrocketed.

One of these conditions is present today in the region—housing costs rising much faster than income. But the other factors are missing. Instead of a surplus of new housing fed by easy money, we have a shortage of housing, tighter credit standards and record levels of cash purchases.

The latest Case Shiller home price index for the region, which matches comparable homes, rose at twice the national average for the year and above the national average in the past two months though price growth was closer to the national average but positive seasonally adjusted.

Job estimates for 2014 and 2015 were released last week and the Bay area grew faster than previously thought (3.8% versus 3.4%) for the year ending in December and the increase for the year ending in January was 3.7% or nearly twice the national average. The San Jose metro area grew a bit more slowly than previously reported while the SF and Oakland metro areas added jobs at a faster pace than previously reported, all areas growing far faster than the state and nation.

Unemployment rates in SF, San Mateo and Santa Clara counties are under 4%.

The national news was more positive also with a strong jobs increase and more evidence that some people are coming back into the workforce.

And the stock market, which had reached major correction territory, recouped more than half the losses. The other bubble in 2000 was in startup companies that had business plans and employees but no business. It was a true bubble with stock prices correcting before not after jobs turned down. There will always be startups in the Valley that do not make it but today our economy and major stock valuations are in big companies with millions of customers.

The numbers say the Bay Area economy is pretty strong and expanding though probably at a slower pace than in recent years. The real danger and possibility, I think is not a bubble like 2007 for housing or 2000 for the stock market and jobs but a failure to address housing and transportation/mobility challenges that could impact regional competitiveness and prosperity.

The good and also scary news is that we hold the future in our hands to a great extent. Our decisions will matter. The bubble in 2000 brought down stock prices but also caused large job losses and rising unemployment. The housing bubble that burst in 2006 brought down prices but also caused foreclosures, bankruptcies and contributed to a recession.

Addressing the impacts of growth while not killing the vibrancy of our world leading innovation center and pool of talent IS the challenge we face. Where better to find solutions than here?

Posted by Don't Count Your Bubbles Before They've Busted,
a resident of Another Palo Alto neighborhood,
on Mar 8, 2016 at 9:43 pm

The Shanghai Index is down about 44% since its high last June (Foreign cash buyers).
The 2015 IPO market fizzled (Social media magnates).
The newer bay area companies have already started the process of lay offs and off shoring jobs to cut costs as their growth slows.
Once the Fed raises rates to a more normal 4%-5% we may yet hear that popping sound.

Posted by Robert,
a resident of another community,
on Mar 8, 2016 at 10:03 pm

What bothers me is not so much whether or not the current tech is a bubble, but the fact that so many here seem to be gleeful at the prospect, like major job and income losses would be something to look forward to...because, why? It would punish those entitled young techies?

Posted by Shaded Freud,
a resident of another community,
on Mar 8, 2016 at 11:32 pm

"It would punish those entitled young techies?"

No. It's inevitable, so let's get it done while the techies are young and most able to find new careers, and investors can limit their losses. The longer a bubble persists the bigger the burst and the greater the casualties. It's the essential instability of pure capitalism.

Besides, it would save the area from the runaway ruin of overpopulation.

Posted by mauricio,
a resident of Embarcadero Oaks/Leland,
on Mar 9, 2016 at 6:43 am

Tech industry bubble bursts are cyclical and inevitable. Let's face it, more than a few technologies developed in this area are developed to enrich a few, but are not necessary or beneficial to the common person. I'm amazed at some young techies who sincerely believe that the bubble will never burst. Although no-one can predict when exactly the bubble will burst, it will, undoubtedly, so it better happen fast, so the destruction of the Bay area through overpopulation and overdevelopment and its side effects can slow down. If we continue this pace of overpopulating and overdeveloping the bay area, the catastrophic consequences of climate change will be even harsher.

Posted by Experience,
a resident of Another Mountain View Neighborhood,
on Mar 9, 2016 at 2:02 pm

The 2000 tech bubble consisted of hundreds of small publicly traded .com companies which were overbought by an overly enthusiastic public and which produced no earnings. That was why it popped.
Today's tech companies in this area are much more well established and set up for the long haul. Just because tech is dominant in this area does not mean it is a bubble poised to burst.
Google and most of the established big tech players aren't going anywhere anytime soon. Redmond, WA comes to mind, but with multiple Microsofts.

Posted by stephen levy,
a resident of University South,
on Mar 9, 2016 at 5:08 pmstephen levy is a registered user.

Two more sets of data were released today.

The Quarterly Census of Wages and Employment (for all counties) showed stronger than expected gains in our area for Q3 2015 with peninsula counties ranking high on average wages and wage gains. Some but not all of these gains are from the continuing tech expansion but the drop in unemployment helps a broad group of residents as does the income earned in tech and other high wage sector.

Also today the state EDD reported that jobs in California in January 2016 were around 60,000 higher than reported last week with upward revisions in information and professional services (tech centered) as well as in retail and other sectors.

At least most posters who think bubbles are likely have clarified they are talking about a possible future not current events here in the region. All of the data suggests growth is continuing and the conditions that prompted the dot.com crash and the housing bubble bursting in 2006 (these were indeed bubbles bursting) are not present today.

As the last poster noted, a lot of small companies going bankrupt as happened in 2000 cannot be translated into the big companies today in that same plight. They have business plans, millions of customers, great products and lots of funds. While any one company can lose in the competition for customers the overall sector seems on firm ground. I have not heard anything to counter this except vague references to inevitability.

I agree with Robert that it feels like some posters are rooting for a recession in some kind of anti tech worker envy at least for younger tech workers. That is really disappointing for me to find people who seem to wish harm to others.

The residents who plan and care about the region where we live will fare better with real information not envy of young residents who work in tech.

Posted by mauricio,
a resident of Embarcadero Oaks/Leland,
on Mar 10, 2016 at 9:53 am

The "envy of young residents who work in tech" is a straw man, one of several ridiculous ones used by the urban ideologues and aimed at the responsible people who try to slow down and reduce the massive overdevelopment and overpopulation of the Bay area. There is no envy of young tech workers anywhere. There is criticism of companies who don't pay their young new employees nearly enough to buy and rent in the Bay area, yet expect residents to solve this problem for them. There is deep concern over the massive overpopulation of the Bay area with the potential castastrophic consequences of climate change looming.

I agree that companies like Google and Facebook will be around for a while, but there is already an ever increasing trend of local tech companies outsourcing jobs and replacing local techies with foreign workers who come in with their special work visas and work for reduced salaries and benefits. This in itself could cause the bubble to burst.

Posted by The Old Techie,
a resident of Barron Park,
on Mar 10, 2016 at 5:44 pm

"Today's tech companies in this area are much more well established and set up for the long haul."

Yup. That could have been said about auto manufacturers in Detroit in 1975, just four years before the first Chrysler bailout presaged the deep decline of the entire industry. In fact, it almost certainly was.

Never forget that tech is far more portable than making cars, trucks, or even buses ever could be. Ask anybody who knows programming.

Business cycle are inevitable. Times are still pretty good...Almost too good. Warning younger tech workers to prepare for a rainy day when VC cash isn't as free flowing isn't wishing them ill. Rather, it's providing them advice from people who have lived through previous bay area booms and busts.

Posted by stephen levy,
a resident of University South,
on Mar 11, 2016 at 2:30 pmstephen levy is a registered user.

Yes MenloMOm nothing is forever in the economy but cycles and recessions are not the same as bubbles in asset prices or the economy. Both the dot.com asset and job bubble were not caused by a recession and the housing price/foreclosure bubble came before and partially caused the ensuing recession.

Personally the younger tech workers I know including my son are well aware that jobs and what's in change rapidly and probably do not need your warnings sincere or not.

Mauricio continues to make some really strange arguments.

If climate change is really a global challenge, then it makes no difference in one sense if people live here or elsewhere. On the other hand shifting to see global emissions being reduced if people move to warmer climates like the Central Valley or Texas instead of living here.

It is interesting and disappointing to see posters wanting to address impacts by asking others to do things but offering to do nothing themselves. If the region and quality of life do not suit you, why not you do the moving? Or help to address housing shortages and auto use for commuting.

This was a major university town and innovation center before nearly everyone here moved here including me in 1963. What if they had said "no more" you are not welcome here-you disturb my peace and quiet.

And, yes, tech is portable but that has not stopped this expensive region with high environmental regulations from being immensely popular with companies, entrepreneurs and families.

Maybe it will all change or maybe posters are mostly just voicing their wishes but the people who manage our cities and counties, companies and public agencies should not base their planning on the dream that challenges will disappear because we are about to enter a big long lasting downturn.

Stephen, the economy becomes over exuberant, an asset bubble of some sort is formed and when it pops our economy over corrects into a recession. These are not separate phenomena. The bubble is the boom and the recession is the bust.

The asset bubble moves around...dot.com, housing. I can't tell you what it is this time but I do believe that this time is not different. The economy is looking frothy. The Fed made money cheap with low interest rates for an incredibly long time. Rates are now being raised. Something will pop, jobs and housing will take a hit. They will recover and usually do so rapidly around here.

I do agree that the Bay Area still needs to address the shortage of affordable housing, aging infrastructure and an increasing population. Those problems won't go away. Even in recessions this area performs well but the affordable housing and overpopulation issues will be somewhat mitigated when the economy changes.

This reminds us that the term :start up: does not refer only to VC/angel funded new companies but that big companies are starting new units all the time. These ventures while not all will succeed are not subject to the IPO/stock market fluctuations.

The second piece of news is that "underwater" homes are down to 1.9% in Santa Clara County and 6.4% in the region while the Fed reported that in 2015 the % of homeowners nationally with more than 25% equity surged.

This all reinforces the idea that regional leaders need to work hard to prepare to handle the impacts of a strong economy and a great place to live and work.

A slowdown (not a bubble or loss of competitive advantage) will certainly come at some point but right now we are a place where companies and people want to be and lead the 21st century economy.

Homes go underwater bigtime after a bubble bursts, not before. Remember 2007? In fact, a low underwater rate is a better index of bubble intensity than durability.

I have not, contrary to insinuations, made a bubble doll and begun sticking pins into it. But having witnessed three major local bubbles grow and pop over the past half century, I am not investing fresh cash in this bubble either. As I believe Thomas Aquinas observed, knowing is not willing.

Posted by Cherry Picker,
a resident of Another Palo Alto neighborhood,
on Mar 14, 2016 at 9:57 am

The blog suffers from confirmation bias. Any objective review of economic indicators are mixed at best. Those of us who have lived through the boom/bust cycle of the valley and the maturing process of startups off shoring jobs as they grow up don't see anything different this time. Corporations are just more efficient at closing shop or inverting.

So the following are a few other data points just to round out Steve's cheery bowl of fruit:

- GDP in the west is stagnant below 2% per year and in emerging markets is declining
- Global central bank posture is biased towards fighting over liquidity and deflation
- Another round of currency devaluation has started by China and Japan
- VC startup funding is down
- IPO valuations 1 year out is negative
- Layoff rounds have started
- Corporate earnings are declining
- Net domestic population in both California and silicon valley is negative

Please consider the history of the following communities and then consider them on steroids / Tech (SF to SJ). And without political restraints. There's too much demand for supply and there's no more LAND.

Blah Blah Blah, sure if you find a home in a desirable area and hold it for 30 years you are highly likely to come out ahead. But, buying at the peak lowers the return on your investment. If you bought in 2000, you made less than your neighbors that bought in 2002 (same for 2007 vs 2009).

Posted by Cassandra,
a resident of another community,
on Mar 17, 2016 at 10:25 pm

Arguably the most robust indicator of an impending bubble bust is the count of economists denying the existence of a bubble. Nobody speculates about the longevity of a bubble earlier in its life cycle.

Posted by Jesse,
a resident of Palo Alto High School,
on May 8, 2016 at 11:24 am

Here's the big flaw that no body seems to hit on..... These tech companies don't actually produce any tangible goods or services, with the exception of Uber. The bay areas economy is based on Twitter, Facebook and Instagram. Nothing tangible, nothing real. It's an economy based on morons taking pictures [portion deleted] and posting them. Then advertisers pay to put their adds on these sites. How rediculous!!!!!! Most of these companies are so over valued, and unimportant to society. The Bay Area will get what it deserves.

Posted by Steve Levy,
a Palo Alto Online blogger,
on May 8, 2016 at 1:12 pmSteve Levy is a registered user.

Well Jesse most of us consider that Apple, Google, LinkedIn, Facebook as well as H-P, Cisco, Intel, Tesla and countless other tech firms produce both goods and services that are tangible and enrich our lives.

Posted by Birdie,
a resident of another community,
on Jun 7, 2016 at 4:50 pm

I have worked in semiconductors since the 70's. I've lived and worked through many a bubble/recession. I'm one of those people with a "high" income. I own rental housing out of state and am a renter here.

1. Rents are too high, incomes have not kept up, and soon people will be priced out of the region, me included. 1 Bdrm apts are over $2K.

2. Even with my income, with the high rents it means I can't save enough to put 20% down on a million dollar 1050 sq ft tract house in Santa Clara or other South Bay Area home. Who really can save $250K to put down on a house?

3. The current situation is unsustainable. Let me repeat: it is not sustainable. Unless we have more *affordable* housing solutions, the hordes of people buying those high priced houses will wind down to a trickle. And without the first time home buyer, the entry level buyer, sales will dry up as no one buys.